Macroeconomics - L10 Low Inflation Flashcards
Provide a definition for inflation.
The general increase in prices of goods and services over a period of time.
What is the goal of low inflation?
The goal of low inflation is to achieve a sustained increase in the general level of prices of between 2 – 3% on average over the medium term (5-7 years).
Provide a definition for disinflation.
Disinflation refers to the general increase in prices of goods and services over a period of time, that is slower than the previous period.
Provide a definition for deflation.
Deflation refers to the general decrease in prices of goods and services over a period of time.
How does the ABS (Australian Bureau of Statistics) calculate the rate of inflation?
To calculate the rate of inflation, the ABS compares the cost of purchasing a ‘basket’ of goods and services in one period of time, with the cost of purchasing the same basket of goods and services in the previous period. The increase in cost becomes the rate of inflation.
What is the formula that is used to calculate inflation?
Price index (end) - Price index (beginning) / Price index (beginning) x 100
List 4 impacts of high inflation.
- The erosion of purchasing power
- Loss in international competitiveness
- Damage to business confidence
- A wage-price spiral
What will happen if the inflation rate is below 2%?
Households (consumers) are likely to delay spending because they feel that the price of a good or service will not go up to quickly so there is no incentive to make the purchase decision now.
Businesses (producers) also delay spending for similar reasons.
What will happen if the inflation rate is above 3%?
Consumers’ purchasing power will be eroded, so they consume less which leads to lower levels of production and slower economic growth.
Workers demand higher wages, increasing the cost of production, again having a negative impact on economic growth.
